Creating Real Growth in the Face of Uncertainty
A long term perspective on value creation in times of economic turbulence.
The Innovation Landscape Has Changed
During periods of serious economic turbulence, experience and data tell us that several things are bound to occur that impact the innovation landscape. This, in turn, creates unique opportunities for adaptable corporations capable of moving with purpose to seize them.
1. Corporations significantly pull back from investment & collaboration
The vacuum left by competitors creates an opening to direct innovation earlier and with greater influence, as other paths to market are closed off for emerging ventures.
2. Access to capital becomes scarce for emerging ventures.
Decreased investor activity drives valuations lower and creates special situations where ventures with valuable technology and otherwise solid operations face impaired capitalization situations that corporations are well suited to help solve.
3. Company creation declines as talent becomes more risk averse
Technical and entrepreneurial talent becomes abundantly available for companies seeking to bolster the strength of their teams for the future
In deeply analyzing previous downturns, most notably the Great Recession, we have found that companies who choose to aggressively pursue decisive growth-focused initiatives — instead of focusing solely on cost cutting — actually gain significant strength while developing a structural advantage that leads to long term outperformance as the economic environment improves.
Organize for Innovation
At its core, organizing for innovation in the midst of a downturn means embarking on a systematic search for emerging opportunities. This is accomplished by investing in the creation of entirely new businesses developed outside the core organizational structure while leveraging a similarly agile and collaborative posture to drive operational efficiency.
Research done by the Harvard Business Review confirms this approach and found that companies who deployed a specific combination of defensive and offensive moves had the highest probability of outperforming — or “breaking away” — from competitors after a recession.
This squares with recent findings from Gartner. Companies who outperformed coming out of the Great Recession were ones that pursued a dual-track approach of continuing to invest in growth — including an aggressive approach to new investments, acquisitions, and talent programs — while taking proactive measures to drive operational improvements.
The outperformance from this cohort of companies has continued in the subsequent decade.
Leverage the Balance Sheet
Intelligent utilization of the balance sheet to fund growth-focused initiatives is a common characteristic among many of the companies who produce persistent outperformance after a recession. Taking a capital-forward approach to growth helps corporations unlock a combination of new business opportunities and unique insights that can be fed back into core operations to drive efficiency.
TechNexus internal research shows that the most active corporate investors into early stage ventures during the Great Recession (mid-2007 through late-2009) significantly outperformed the S&P 500 on average in the decade of recovery that followed.
In the ten years post-Great Recession, the average stock performance among the active investing cohort was 378.25% with a median of 271.29%. In contrast, the S&P index grew 189.05% during the same period. Even if we remove an outlier like Amazon from the dataset, the outperformance among this active group of corporate investors is impressive.
Ramping up activity during the downturn allowed these companies to efficiently take advantage of lower valuations while providing a structural foundation capable of capturing future growth.
Optimize for Optionality
The rise of disruptive technology platforms and emerging business models accelerates during periods of economic turbulence, leading to the creation and forging of generational companies, driving attractive venture returns, and creating unique opportunities for transformational M&A.
Companies like Stripe, Square, Twilio, Airbnb, and Uber were all founded in the wake of the Great Recession while standouts like Workday, Spotify, and Hubspot were founded just before the downturn hit.
The same factors that drive attractive venture returns also create the opportunity for companies to make transformational acquisitions at compelling prices. This is especially true for companies who remain actively engaged in the venture ecosystem as investors and collaborators, capturing ongoing insight and developing the institutional muscle to work effectively with emerging companies.
Adobe invested actively throughout the crisis, backing a dozen ventures in what were often very early stage rounds. This helped the company stay close to emerging trends like cloud computing, data & analytics, and subscription business models. And while the acquisition was met with significant initial skepticism — different customers, conflicting business models, remaining economic uncertainty — it eventually served as the foundation for Adobe’s transformation to the cloud.
Today, Adobe Creative Cloud does nearly $8b in Annual Recurring Revenue and trades (even after the recent market reversion) at over 12x sales, making the 5.2x sales multiple it paid for Omniture seem like a bargain.
The uncertainty of our current environment provides, by circumstance, a unique opportunity for companies to capitalize on similarly attractive access to emerging technologies and disruptive business models resulting from decreased competition and favorable valuations.
As competitors pull back — paralyzed by conservatism and an inability to act decisively — corporations that organize for innovation and proactively invest in growth will gain strength through this current downturn and will emerge with a structural advantage capable of driving compounding outperformance over the long term.
